CFA Institute Research Challenge
Hosted in
Local Challenge CFA Society of China
Zhongnan University of Economics and Law
Ruixue Guan
Zhengda Li
Lingfei Dong
Jiawei Chen
Yiting Shen
Zhongnan University of Economics and LawStudent Research
Highlights
We initiate coverage on CHINA VANKE CO., Ltd. (Vanke) with a Hold recommendation
based on a one-year target price of ¥27.07, offering 10.80% upside from its closing
price of ¥24.43 on December 18, 2015. Our recommendation is primarily driven by:
Management Platform - Vanke has been able to adapt to a changing environment
in the real estate industry through adopting Asset-Light Strategy, utilizing an
efficient web-based marketing campaign and applying business partnership
management system. Through these business practices, Vanke has maintained
stable profitability and growth
Growth Drivers Vanke has been maximizing its revenue by increasing market
share, enhancing pricing power and expanding its business line to a broader scope.
As the market tends to be mature and occupancy rates stand at a stable level, large
companies as Vanke will occupy a market share steadily in the short term. Thus
growth will primarily be driven through real estate development business, for which
the company is well positioned
Valuation - Valuation methods indicate a current intrinsic value of ¥27.07 per share.
Vanke offers slight long-term upside through main business improvement in such
areas as real estate value-added services, commercial real estate and logistics real
estate business, as well as strategic expansion into the overseas market and bold
attempt to financial innovation as Asset Backed Securities. We evaluated Vankes
intrinsic value primarily through abnormal return method and a relative multiples
valuation
Main Risks to Vanke Include Adverse changes in macroeconomic conditions and
inevitable downturn in real estate industry, a possibility of price disadvantage
resulted from land storage insufficiency, instability of management and reduction in
company value due to unsuccessful restructuring
Recent News
Jushenghua Transfers Full Voting Rights (1.473bn shares) to Foresea Life
Insurance – 04/09/2016.
Vanke signs a cooperation memorandum with Shenzhen Metro Group
03/14/2016.
Vanke announces repurchase of A share within a RMB 10bn limit
09/17/2015.
In RMB ,000,000s
Market Profile
Closing Price(RMB)
24.43
52-Week High/Low
RMB
24.43
Average Daily
Volume
238,196,223.8
Market Cap
(RMB Million)
269,686.48
Shares Outstanding
Million
11019.43
Dividend Yield
2.20%
P/E
14.88
P/B
2.69
EV/EBITDA
8.27
Valuation
ARM
Multiples
Estimated Price
¥27.63
Weights
50.0%
Target Price
¥27.07
Buy
Hold*
Sell
15% or
greater
Flat returns
Negative
returns
Key Ratios
2013A
2014A
2015A
2016E
2017E
2018E
Revenue
127,453.0
146,388.0
195,549.1
239,078.4
295,787.8
367,841.7
Growth Rate
31.6%
8.1%
33.6%
22.3%
23.7%
24.4%
Net Operating Profit
24,261.3
24,979.4
33,122.8
42,218.4
52,938.6
66,233.3
Net Profit Margin
13.5%
13.2%
13.3%
13.7%
13.8%
13.9%
Assets liability Ratio
0.776
0.769
0.773
0.756
0.760
0.748
Current Ratio
1.361
1.362
1.321
1.343
1.325
1.338
Return of Equity
19.7%
17.9%
18.1%
19.4%
20.5%
21.4%
Diluted EPS
1.37
1.43
1.64
2.07
2.58
3.23
Property Sector, Real Estate Industry
Shenzhen Stock Exchange (SZSE)
China VANKE CO., Ltd.
This report is published for educational purposes only by students
competing in The CFA Institute Research Challenge
Date: 27/04/2016 Current Price: RMB24.43 Recommendation: HOLD (10.80% Upside)
Ticker: 000002.sz USD1.00: RMB6.48 Target Price: RMB 27.07 (USD4.18)
Source: Wind
0
1000
2000
3000
4000
5000
6000
0
5
10
15
20
25
30
RMB per Share
Share Price Movement
Vanke CSI300
0.66
0.88
1.14
1.37
1.43
1.64
0.00
0.50
1.00
1.50
2.00
2010 2011 2012 2013 2014 2015
RMB per Share
Vanke Earnings Per Share
Source: Company Annual Report
Source: Wind
Rating Guide (over the next 12 months)
*A hold rating recommends that investors take
a position slightly above the security’s weight
in the CSI300 Index.
Source: Team Estimates
Business Description
CHINA VANKE CO., Ltd. (Vanke), established in 1984, is the largest residential real
estate developer in China. It is engaged in developing, managing and selling properties
across more than 60 mainland Chinese cities, with the provision of investment, trading,
consultancy services and e-business. It also has expanded into Hong Kong, the United
States, and Singapore since 2012 and Britain in 2015.
Vanke’s main business contains real estate development and estate management. The
sales area and the sales of commercial housing amounted to 206.710 thousand square
meters (14.3% of growth YoY) and RMB261.47 trillion (20.7% of growth YoY)
respectively in 2015.
On average, 97.27% of Vanke’s total revenues are derived from the sales of real estate,
the rest are from estate management and other businesses. (Figure 1). With the rapid
development of its real estate business, Vanke’s net income has grown steadily from
RMB7.28 to RMB18.12 billion during the recent 6 years. (Figure 2)
Shareholder Structure
Vanke is owned by three major shareholder groups and the public. As the largest
shareholder group, Shenzhen Jushenghua Co., Ltd. (Jushenghua) and its coordinated
actors own 24.26% of the total shares. China Resources Co., Ltd. (CRC) own 15.29%,
followed by HKSCC NOMINEES Limited (HKSCC) with 11.90%. The remaining 48.55%
are owned by the others. (Figure 3). Since July 10 to December 18 in 2015, Jushenghua,
controlled by Baoneng, had become the first major shareholder group by stock
purchase. But this has no significant impact on Vanke’s operations since it has not gotten
the controlling interest yet.
Corporate Management
To stimulate the enthusiasm and creativity of the management team, Vanke continually
deepens the construction of the Partnership mechanism, especially in the estate
management business. The organizational framework has also been altered. The
strategic investment department of the headquarters was transferred into cause
development department to accelerate the business innovation.
Company Strategies
The company’s strategic direction focuses on the enterprise transformation and
another three points:
Consolidate the core business Vanke aims to remain strong in real estate industry
with a steady growth of its market share and strengthen the quality management to
meet the increasing demand of its customers. To develop substantially, Vanke plans to
continually apply strict control on its cost of acquiring land. With 92.19% of the
programs in first and second-tier cities, Vanke’s sales is closely related to these cities
and has been merely influenced by the de-stocking pressure in third and fourth-tier
cities. (Figure 4). The Asset-Light Strategy has also been proved to be a substantial
way to increase the company’s ROE, by improving the efficiency of fund application.
Develop real estate value-added services Vanke intends to transform from merely
a real estate developer into an urban auxiliary service provider by developing real
estate value-added services, including Vanke Yi, Vanke Shu, Vanke Yun and so on. In
Vanke Yi business, the development and operation of long-term rent apartment, over
1,000 apartments have already been opened and more than 20,000 are preparing for
opening. As for Vanke Shu, it contains camping programs and systematic education,
mainly targeting on the consumers’ demand of children’s education. Vanke also
explores to serve the need of small-scale companies and Makers, namely Vanke Yun,
by supplying business incubator and joint offices. The estate management business
has upgraded its Intelligent Service System with the improvement of the service mode.
Expand oversea market Taking globalization as the long-term development
direction, Vanke has invested in oversea programs since 2013 and has already
expanded its oversea market to 5 cities, including San Francisco, Hong Kong,
Singapore, New York and London. In 2015, Vanke entered the Britain market for the
first time by cooperation and got three new programs in New York as well as one in
Hong Kong. The sales area of oversea programs amounted to 28 thousand square
meters and attributed RMB2.88 trillion to the sales in 2015.
Innovation in business line Vanke determines to become the largest industrial real
estate provider in 5-10 years. Founded in 2015, Vanke Logistics Real Estate
Development Limited has achieved the breakthrough in the business, with the
acquisition of two programs, one in Wuhan and another in Guiyang. Vanke is also
proactive in financial innovation, as the Foresea Vanke Mansion has been the object of
the first public offering REITs in China.
97.27%
1.52%
1.21%
Figure1. Revenue Breakdown
as of December 31,2015
Real Estate
Estate Management
Others
24.26%
15.29%
11.90%
48.55
%
Figure 3.Shareholder
Structure
Jushenghua CRC
HKSCC Others
Source: Company Annual Report
Source: Company Data
7.28
9.62
12.55
15.12
15.75
18.12
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
2010 2011 2012 2013 2014 2015
RMB Billion
Figure 2. Net Income
Source: Company data
7.81%
92.19%
FIgure 4. Distribution of the
Programs
First and Second-tier Cities Other cities
Source: Company data
Industry Overview and Competitive Positioning
China’s Economic Performance
Affected by the periodic fluctuation of commodity market and the economic instability
of some European countries which greatly weakens China’s export, together with the
diminishing marginal utility of government investment, China’s economy is facing
tremendous difficulties these years.
But owing to the encouraging progress made in structural adjustment, China’s economy
still managed to operate with an appropriate range, reaching RMB67.7 trillion with an
increase of 6.9% over the precious year-on-year (YoY) growth. The services sector as a
proportion of GDP rose to 50.5%, accounting for more than 50% for the first time. The
contribution of consumption towards economic growth reached 66.4%. So it is
reasonable to predict that China’s economy will continue to develop in a middle-high
speed stably. (Figure 5)
Demand-side Analysis
Sales of Commercial Housing Promoted by Urbanization
It is estimated by our team that 1% growth of urbanization rate results in 5.11354%
increase of the sales of commercial housing. According to the “National Plan on New
Urbanization” carried out in 2014, the urbanization rate will continue to grow 1.35%
per year, bringing about 6.90309% increase of sales of the latter at the same time.
Psychoanalysis of Consumers
Fearing of the soar of the price, housing potential buyers always tend to make their
decision when the price of commercial housing raise steadily. With a slowly increase of
the price this year, a simultaneous expansion of sales can also be expected.
Supply-side Analysis
Shrinking Supply in Recent Years
With a dramatic diving of year-on-year growth rate of real estate investment, from the
initial stage (31.09%) to 3.02% in February 2016, the supply of real estate is
prominently shrinking these years. If the regression is over, it may take tremendous of
times to meet the increasing demand, resulting in a boom of the prices, especially in
those first and second-tier cities where inventory is only enough for few months.
Lower Cost Helps Improving Profit of Real Estate Industry
Cement and deformed steel bars, two major building materials of housing, are still
extremely cheaper than several years before, dropping from RMB427/ton to
RMB235/ton (PO 42.5 in Jiujiang) and RMB5230/ton to RMB2374/ton respectively,
which helps partly secure the profit of real estate companies to a certain extent.
Policy Analysis
“De-Stocking” Policy Booming Real Estate Market
Implemented by the Central Economic Work Conference, de-stocking of the real estate
market has become a top priority of government work this year, and many simulative
policies such as lowering down payment to 20%-25% and benchmark interest rate to
4.9% and so forth are carried out. It is proved effective soon in first and second-tier
cities where prices soar from quickly, owing to the demand created by many new
immigrants.
Prudent with a Slight Easing Bias Monetary Policy and Increasing Deficit-to-GDP
Ratio
According to the research carried out by Yunnan University of Finance and Economics,
the relationship between growth rate of commercial housing price and that five major
variables which can influence it to a great extent are shown in the following model. If
the M2 supply and the per capita income of both urban residents continue to grow as
expected, with the help of this model above, we can conclude that the price will continue
to growth 10.6783%, 12.1175%, and 12.8028% respectively in the following three
years and is 39.9767% higher than that of 2015 in 2018 in total.
Comparative Analysis
As what is shown in the table, compared with the Japanese data in 1990, China is still
far away from the crash of real estate market. China’s urbanization rate and the GDP per
capita is still 21.3% lower and 16560 dollars less than that of Japan, giving China a great
potential to improve the sales of commercial housing and the ability to remain a middle-
high economy growth (6.5%-7%) in the following years, and therefore, improving the
real purchasing power of Chinese residents.
Commercial Housing Price of
Last Year
M2 Money Supply
Per Capita Income of Urban
Households
GDP
GDP of Last
Year
0.4761
0.4504
0.3219
-0.4257
0.2801
0
20
40
60
80
0
5
10
15
2010 2011 2012 2013 2014 2015
Figure 5. Contribution Rate to
GDP of Consumption and GDP
Growth Rate
GDP Growth Rate(%)
Contribution of Consumption(%)
0
20
40
60
80
2010 2011 2012 2013 2014 2015
Figure 6. Contribution Rate to
GDP of Different Sectors
Primary Industry(%)
Secondary Industry(%)
Tertiary-industry(%)
Source: National Bureau of Statistics
Source: National Bureau of Statistics
0%
10%
20%
30%
40%
50%
60%
70%
0
50000
100000
150000
200000
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017E
Figure 7. Urbanization rate and
the sales of commercial housing
Sales of Commercial Housing
Sale(10,000 Square Metres)
Urbanization rate
Source: National Bureau of Statistics, Team
Estimates
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
2010-02
2010-06
2010-10
2011-04
2011-08
2011-12
2012-06
2012-10
2013-03
2013-07
2013-11
2014-04
2014-08
2014-12
2015-05
2015-09
2016-02
Figure 8. Growth Rate of Real
Estate Investment
The Investment of Real EstateYOY
Source: Genius Finance
Table 1. Parameter Influence Coefficient of Commercial Housing Price
Source: Yunnan University of Finance and Economics
Competitive Positioning
Bargaining Power of Suppliers | MODERATE
The main suppliers in real estate industry are land and building material suppliers.
Lands are possessed by the state and provided limitedly by the local government in
mainland China, which means land suppliers have a strong bargaining power. As for
materials, overcapacity in traditional industries as steel and cement has weakened their
bargaining power in providing products. The strong bargaining power of upstream
industries and the leading effects of Vanke itself are the key determinants in our
MODERATE assessment of bargaining power of suppliers.
Bargaining Power of Customers | INSIGNIFICANT
On the one hand, more people will enter big cities as urbanization goes. These
newcomers to metropolis, who own no accommodation in the migrant cities previously,
have rigid demands towards housing. On the other hand, urban inhabitants are still in
exuberant needs of improving living conditions, which gives rise to the growth of
Improved Housing market. The two factors account for the reason why bargaining
power of customers in major big cities is weak. With more than 90% of Vankes real
estate business expanding in first and second-tier cities in which demand of housing
exceeds supply mostly, we assess the bargaining power of customers as
INSIGNIFICANT.
Threat of New Entrants | INSIGNIFICANT
With a notable downtrend in real estate industry and a stricter governmental regulation,
entering this industry has been harder than before. There are 141 domestic real estate
listed companies, which means it’s quite difficult for the new entrants to grab a share in
the big market compared with old ones who own a more competitive position in getting
funds, lands and materials. These significant barriers (large market size, destocking
pressure, newcomer disadvantages) to entry are the basis of our INSIGNIFICANT
assessment of the threat of new entrants.
Threat of Substitute Products | INSIGNIFICANT
The major substitute of commercial residential housing is ensuring housing, which
includes low-rent housing, affordable housing and public rental housing. However,
these housings are quite different from commercial housing. Neither are those housings
provided with property rights, nor can they be traded freely. As we estimate the
substitute effects to be weak, the INSIGNIFICANT assessment is given.
Competitive Rivalry within Industry | LOW
The operating revenue of real estate business accounts for more than 98% of Vanke’s
Prime Operating Revenue, among which commercial residential housing makes up the
largest portion. The concentration ratio of real estate industry is rather low. While the
top 4 real estate companies take up a market share of barely less than 10% (Figure 12),
Vanke has the biggest market share of about 3%, rising by 0.94% in 5 years. Apart from
fierce competition among a great many joint stock enterprises, advantages due to land
policies are more obvious compared with their state-owned counterparts. Some of
Vanke’s major competitors, namely Evergrande, therefore, has a broader business line.
In addition, the investment growth rate has slowed down, falling from about 20% YoY
in 2013 to no more than 5% in 2015 within 3 years. As the largest enterprise in this field,
however, Vanke is apparently more capable of resisting risks of being squeezed out than
its competitors. Consequently, we assess the competitive rivalry within industry to be
LOW.
As of December 31, 2015
Investment Summary
We issue a Hold Recommendation on CHINA VANKE CO., Ltd.(Vanke) with a target price
of $27.07 using an Abnormal Return Method and a Relative Multiples Valuation. This
valuation is supported by numerous merits, as outlined below, as well as concerns taken
into consideration:
Competiting Positioning
Vanke
Poly
Evergrande
Greenland
Market Capitalization (RMB bn)
263.09
114.44
79.81
198.71
Sales (RMB bn)
261.47
154.1
201.34
230.1
Sales Area (thousand square meters)
20,671
12,180
25,512
21,760
Market Share
3.00%
1.77%
2.31%
2.64%
Revenue: Real Estate (RMB bn)
190.21
118.62
126.45
99.58
Gross Profit Margin
28.75%
32.62%
28.10%
24.27%
0
1000
2000
3000
4000
5000
6000
0
100
200
300
400
500
2010 2011 2012 2013 2014 2015
Figure 9. Price of Cement and
Deformed Steel Bars
Cement PriceRMB/ ton
Deformed Steel Bars PriceRMB/ton)
Source: Shanghai Future Exchange, China
Cement Research Institute
0
2000
4000
6000
8000
10000
Figure 10: Commercial housing
price
Commercial Housing Price(RMB/square
metres)
Source: National Bureau of Statistics, Team
Estimates
0
1
2
3
4
5
Bargaining
Power of
Suppliers
Bargaining
Power of
Customers
Threat of New
Entrants
Threat of
Substitute
Products
Competitive
Rivalry within
Industry
Figure 11: Porter’s Five Forces
Analysis
2.06%2.06%
2.19%
2.09%
2.82%
3.00%
5.80%
5.90%
7.50%
7.20%
9.70%
9.72%
0%
2%
4%
6%
8%
10%
12%
14%
2010 2011 2012 2013 2014 2015
Figure 12: Market Share of Sales
in Real Estate Industry
Vanke CR4
Source: Company Data
Source: Team Analysis
Merit
Rigid Demand Created by Urbanization Promotes Commercial Housing Sales
According to our model, every 1% growth of urbanization rate can lead to 5.1134%
increase of sales of commercial housing. Meanwhile, the target China’s urbanization
rate of 2020, which is 3.9% higher than that of 2015(56.1%), was already set by
“National Plan on New Urbanization” carried out in 2014, indicating an annual
6.90309% growth rate of the sales of commercial housing promoted by it on average.
That’s to say, if the urbanization can be promoted as expected, there will still be a
strong rigid demand created by it, offering the whole real estate industry a valuable
chance to de-stock or sale more. As a part of this huge industry, Vanke’s main business
may also benefit from the increasing sales of commercial housing, and therefore,
strengthen the profitability of it.
Prudent Monetary Policies Leads to Abundant Capital within Industry
The People’s Bank of China (PBC) continues its prudent monetary policies in 2015, with
5 times of reduction of interest and lending rate reduced to a historically low 4.9%. The
reserve requirement ratio (RRR) also fell back to an easing policy level. From the
perspective of industry capital, the real estate developing capital has reached RMB
12.52 trillion in 2015, reporting a 2.2% (YoY) increase. From the perspective of
formation of capital source, domestic loans and self-raised funds take up 14.6% and
39.2%, showing a 1.3% (YoY) decrease and a 2.2% decrease (YoY) respectively.
Loosening credit policies and continuous downtrend of market interest promote the
sales market, resulting in other sources (mainly pre-payment and mortgage repayment)
of real estate developing capital increasing 3.7% to a total of 44.5%.
Core Build-for-sale Operations Providing High Operating Cash Flows
Urbanization level has been consistently increasing over the years and is expected to
continue this trend in the future. Capital along with talents will surge up big cities
bringing both necessary real estate demands and life quality-improving housing
demands. Besides, the more and more complete competition market will squeeze
smaller player’s space who is confined to their limited capital, brand value, cost control
system on contrary the leading player including Vanke will enlarge market share. So the
two strong growth drivers ensure Vanke consistently meeting regulatory and marginal
goals and keeping high operating cash flows.
A Strong Balance Sheet as a Foundation for Growth and Innovation
Vanke has a favorable cash position as shown by its high liquidity ratios, also the
company has low levels of debt bearing interest lower than most main competitors.
These two conditions give the company financial flexibility to invest logistics industry
and experience new business model such as BOT. By taking the advantage of this
favorable position, Vanke is the first company in China who introduces REITs product
to discover new financing pattern.
Outstanding Management Capability and Stable Growth Drivers
Vanke has been able to adapt to a changing environment in the real estate industry
through adopting Asset-Light Strategy, utilizing an efficient web-based marketing
campaign and applying business partnership management system. Through these
business practices, Vanke has maintained stable profitability and growth. Vanke has
been maximizing its revenue by increasing market share, enhancing pricing power and
expanding its business line to a broader scope. As the market tends to be mature and
occupancy rates stand at a stable level, large companies as Vanke will occupy a market
share steadily in the short term. Thus growth will primarily be driven through real
estate development business, for which the company is well positioned.
Optimistic Outlook for Real Estate Market
De-Stocking of real estate market was listed one of the five primary tasks in 2016 for
the first time in the Central Economic Work Conference in the end of 2015, with
supporting policies as reducing the minimum down payment ratio to 20% and lowering
transaction taxes carried out during Spring Festival. This, undoubtedly, promotes the
de-stocking process. It is not difficult to assume that under the uncontrollable
macroeconomic downturn, investment still plays an important role in steady economic
growth. Both monetary and industry policies will be loosened further. As bonus policies
released continuously and consumer confidence recovering gradually, sales of
commercial housing this year will gain a smooth growth after the recovery in 2015.
Concern
Future Price Constrained by Various Economic Factors
Shown in Table1, the change of M2 money supply, GDP and per capita income of urban
households will greatly influence the price of commercial housing. As what is mentioned
in Economic Risk, China is still on the way of structural transformation, and is suffering
from a L-shaped recovery of economy, if the economy fails to develop in a normal speed,
the growth rate of both GDP and per capita income of urban households may also grow
in a lower speed than expected, or even decrease, and therefore, greatly constrains the
0
5
10
15
20
25
3
5
7
9
Apr-06
May-07
Dec-07
Oct-08
Oct-10
Apr-11
Feb-15
Mar-16
Figure 13: Loan Rates and RRR
Medium & Long Term Loans
Housing Fund Loans
RRR(right)
Source: Genius Finance
0
5
10
15
20
100000
110000
120000
130000
140000
150000
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Dec-14
Apr-15
Aug-15
Dec-15
Figure 14: M2 Money Supply
M2(RMB bn) YoY(%)
Source: Wind
growth of future price of commercial housing. As for Vanke, whose main business is real
estate, may also have more difficulties in making satisfactory profit.
Asset Restructuring Risk Occurring
Vanke is currently confronted with the toughest task asset restructuring and
unprecedented long halt periodalmost throughout its enterprise history. The complex
restructuring may incur various challenges through each stage of the process. The risks,
including instability of the management, incorrect evaluation of target assets,
uncertainty of future performance of the target company and uncertainty of
restructuring success, might generate problems as failure in fund raising, devaluation
of Vanke itself and poor performance in company management or fund utilization.
Operating Risk Revealed by Insufficiency in Land Storage
Though high turnover rate is a symbol of Vanke’s company enterprise image, its
cautious attitude towards land purchase in recent years has led to a decrease of its total
land storage. Once the land prices go up, Vanke is bound to confront the challenge of
losing the price advantage.
Highly Competitive Market
The top 4 real estate companies take up a market share of barely less than 10%. Vanke,
as the biggest real estate developer, has the biggest market share of about merely 3%,
rising by 0.94% in 5 years. Apart from fierce competition among a great many joint stock
enterprises, advantages due to land policies are more obvious compared with their
state-owned counterparts.
Valuation
Considering the traits of the construction trade, we think that abnormal returns method
and comparable company multiple pricing are more objective and stricter to forecast
the future value of Vanke. By estimating the operating, investment and financing
activities, we simulate the possible future financial statements.
Abnormal Return Method
We employ abnormal returns method. This method is chosen for the valuation of Vanke
because of the dividend policy along with the structure traits of the company. We find
that the free cash flow in Chinese companies especially in the construction industry is
unpredictable and the dividend payout rate is not stable, thus making the result of
forecasting methods like DDM or DCF unreliable.
As has been shown in the report, the abnormal returns method is employed as the main
way for us to conduct the absolute valuation of the target company.
Using the net profit obtained from our projected financial statements, capital
expenditure (Ke) as well as net asset at the beginning of the period, we managed to
calculate the abnormal returns for the projected years. (Table 2)
Table 2: Estimation of Abnormal
Return Method(a) (RMB Biliions)
2016E
2017E
2018E
2019E
Net Profit
32.69
40.91
51.05
65.22
Ke
15.21
%
15.21%
15.21%
15.21%
Net Profit in
Base Period
136.31
163.50
197.53
240.00
AE
11.96
16.04
21.01
28.71
0
5
10
15
20
25
30
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
RMB Per Share
Figure 15: Vanke Share Prices and News Flow
Acquisition of
Winsor Properties
Holdings Limited
Standard & Poor's Affirmed
“cnA+” Rating
Buying Shares on
Huishang Bank IPO
Established First REITs in China
Announced 10billion
Share Repurchase Plan
Stock Market Crashed
De-stocking Policies Implemented
Baoneng
Became
Biggest
Sharehold
er
Suspended for Restructuring
Lower Benchmark Interest Rates
Source: Team Estimates
The present value of residual is calculated as the total abnormal returns for the forecast
period*(1+ Period Growth)/ (Ke Period Growth)*present value factor, which is then
added up with the present value of the abnormal value to estimate the total abnormal
value.
By adding the net asset of the basic period and total stock value for the previous periods
as well as by subtracting the minority stockholder’s interest, we get the total value of
stock rights, thus receiving the estimated stock price. (Table 3)
According to our detailed analysis we expect the target price of 26.51.The model is
sensitive mostly to the following factors:
Average Return Rate of the Industry
According to both the demand and the supply side of the construction industry given in
the market analysis, the average return rate of the industry may be boosted by 1)
“National Plan on New Urbanization”, which, based on our model, will bring about
6.90309% of sales each year, 2) herd effect of the consumers fearing the further growth
of the real estate price, 3) the lower cost of the major row materials such as cement and
deformed steel bars, which saw 44.96% and 54.61% drop respectively in the past five
years.
Future Profitability of the Company
From the graph (Figure 17), we can see that during the period of a decade, the ROE of
Vanke hovers above that of the sector average as well as that of the major developers’
average for about 5% except in the year 2008 when the market was shocked by the
Finance crisis. Judging from the trend shown in the graph, we are confident to estimate
that the company is sure to maintain its dominance in profitability in the forecast period.
Basic Assumptions of the Market
Cost of Equity
The cost of equity is calculated using CAPM model. We utilize 10-year government bond
risk-free rate of 2.50%, and the beta is 0.82 based on our regression using CSI300 as
market index. The sum of market and country risk premium is equal to 6.5%.
We ran a regression to estimate the correlation between the rate of return of Vanke and
that of the market. (Figure 18). The result of the regression is employed to evaluate the
effectiveness of our calculation of beta. And the market regression data perfectly
matches our estimations for the beta.
Other Assumptions
The after-tax cost of debt is calculated using value of 6.2% for Vanke and marginal tax
rate is estimated according to the previous financial statements adjusted by the shock
of the new tax policy.
Cost of debt is estimated using Company data from financial statements. (Table 5)
The growth patterns of asset and income are simulated according to the previous years’
and our forecasts on operating income and cost. (Table 6)
Future Assets, both Tangible and Intangible of the Company
By analyzing the balance sheet in the previous years, we find a decreasing trend in total
assets, and predict a consisting drop in the forecast period adjusted by the trend of the
industry.
Peer Group Pricing
Having previously chosen appropriate peer group, we conducted multipliers pricing
using benchmark P/E, P/S and P/B based on three-year forward medians.
We choose the top six companies ranked by market value in the construction industry
to form the peer group that is employed as benchmark.
We treat P/E, P/S and P/B equally in our valuation, as there is no evidence of
predominance of one over the other as well as we assigned equal weights for years
taken under consideration. The price we obtained in such combination is equal to
27.63RMB per share, what results in 27.07 when combined with abnormal returns
method using 50-50 weighting procedure. (Table 7, 8, 9).
Table 3: Estimation of Abnormal
Return Method(b) (RMB Biliions)
2016E
PV of the Perpetual Value
38.45
PV of the Abnormal Profit
192.42
Add
Net Assets in Base Period
136.31
Equity
328.73
Subtract
Minority Stockholder's Interest
36.13
Stock
292.60
Divided
by
Current Shares(Billion Shares)
11.04
Price(RMB)
26.51
Table 4: Regression Results of Beta
Code
000002.SZ
Corporate
Vanke
Market Index
000300.SH
Frequency
Per month
Time Period
from
2015/4/25
to
2016/4/24
Original Beta
0.8254
Adjusted Beta
0.883
Alpha
2.1859
R-Square
0.6127
STD
5.9951
Table 6: Operating Income and Cost
2015
2016E
2017E
2018E
2019E
Total Operating Income
19,554,913.00
23,907,836.64
29,578,775.49
36,784,165.20
47,083,731.45
Growth Rate
33.58%
22.26%
23.72%
24.36%
28.00%
Total Operating Cost
13,815,062.87
16,890,295.86
20,896,674.04
25,987,103.84
33,263,492.91
Gross Profit Rate
29.35%
29.35%
29.35%
29.35%
29.35%
0
5
10
15
20
25
2006 2008 2010 2012 2014
Figure 17: ROE% comparision
Vanke
Secter Avg
Major Developers Average
Source: Wind, Team Estimates
-20
-15
-10
-5
0
5
10
15
20
25
30
35
-20 -10 0 10
the Rate of Return of Vanke(%)
the Rate of Return of the Market(%)
Figure 18: Regression of
Market Beta
Source: Team Estimates
Source: Team Estimates
Source: Team Estimates
Source: Team Estimates
Financial Analysis
Overview
Although real estate industry is strongly influenced by government policies, nation’s
economy and customer’s expectation, Vanke keeps stable earnings growth trend in
violent background situation.
Asset-Light Strategy, High Future Strategy Flexibility
Vanke has been delineating its finance leverage for preparing the increasingly tense
bank loan circumstance and potentially dismal real estate market. Debt bearing interest
only account for 20% for total debt. If exclusive the deposited receivable the asset-
liability ratio of Vanke is only 39%. The OPM strategy successfully helps Vanke lifting
interest burden from finance leverage. (Figure 19)
With the consequence and consistency of the light asset strategy, Vanke’s liquid ratio
and solvency ratio keeps in high level and the growth speed of land reservation remains
stable, even conservative——fortunately the prudence contributes to Vanke getting rid
of inventory and land reservation pressure as peers.(Figure 20)
Execution of this strategy mainly through: 1) participating joint venture projects at the
minority level but sharing higher economic interest by leveraging Vanke’s brand value
such as alliancing with strong players Wanda which will enhance Vanke’s long-term
growth potential not only in residential market but also commercial real estate; 2)
cooperating with private equity; 3) REITs could be a way of for Vanke to liquidate its
previous investments.
Market Share Increasing due to Supply-side Consolidation
We expect Vanke’s veteran build-for-sale business will continue to play a dispensable
role for the company as it expands scale broadens its network and makes its brand more
valuable. Due to the continual urbanization process bringing more and more capital and
people into first and second-tier cities which will enlarge the whole market size and the
continuous success of this segment to help Vanke gain more market share in the
foreseeable years, Vanke’s sale will continuously grow. However, China’s property
industry appears to be heading into a downward growth rate path even under stimulus
policy (some of them are cancelled) because that the urbanization has begun to slow
and homeownership is gradually saturating.(Figure 7) We believe this kind of
Table 5: Cost of Debt
Interest Rate on Bank Deposits
1.25%
Interest Rate on Short-term
Debt
4.35%
Interest Rate on Long-term Debt
4.90%
the Lowest Cash Flow
/ Operating Income
0.01
Table 7: Relative Valuation(a)-PE Method
2016E
2017E
2018E
EPS
2.07
2.59
3.23
P/E
13.37
11.1
8.35
Price Per
Share(RMB)
27.66
28.72
26.96
Table 8: Relative Valuation(b)-PS Method
2016E
2017E
2018E
EPS
21.66
26.79
33.32
P/S
1.5
1.22
0.89
Price Per
Share(RMB)
32.39
32.6
29.82
Table 9: Relative Valuation(c)-PB Method
2016E
2017E
2018E
BPS
10.65
12.61
15.06
P/B
2.15
1.85
1.45
Price Per
Share(RMB)
22.85
23.27
21.77
Financial Condition
2013
2014
2015
2016E
2017E
2018E
2019E
Profitability
Return on Equity
19.7%
17.9%
18.1%
19.4%
20.5%
21.4%
22.7%
Return on Assets
6.4%
6.2%
6.2%
6.6%
6.7%
7.2%
7.1%
Return on Invested Capital
19.7%
20.7%
26.2%
23.5%
27.1%
28.7%
30.5%
Net Profit Margin
13.5%
13.2%
13.3%
13.7%
13.8%
13.9%
13.9%
Financial Leverage
Debt/Asset
77.6%
76.9%
77.3%
75.6%
76.0%
74.8%
75.8%
Debt with Interest/Debt
13.4%
12.6%
11.8%
10.4%
8.5%
7.4%
5.7%
Current Asset/Asset
92.9%
92.1%
90.2%
90.7%
91.9%
92.5%
93.7%
Equity Multiplier
4.47
4.32
4.41
4.10
4.17
3.97
4.13
Liquidity
Current Ratio
136.1%
136.2%
132.1%
134.3%
132.5%
133.8%
131.4%
Quick Ratio
33.1%
41.1%
40.3%
38.8%
42.6%
39.6%
41.2%
Interest Coverage Ratio
516.3%
527.6%
1070.8%
2291.9%
3136.1%
4122.1%
5546.0%
Debt-to-long Capital Ratio
36.5%
34.4%
35.2%
31.6%
28.1%
24.6%
21.3%
Activity
Inventory Turnover
28.0%
32.3%
37.5%
39.8%
41.4%
42.4%
43.0%
Asset Turnover
28.7%
29.2%
32.6%
35.7%
36.0%
38.6%
38.8%
Shareholder Ratio
Dividend Payout Ratio
13.1%
28.7%
30.5%
24.1%
24.1%
24.1%
24.1%
Earnings Per Share
13.7
14.3
16.4
20.7
25.9
32.3
41.3
0%
20%
40%
60%
80%
100%
Figure 19:Tangible
assets/Debt with interest
Source: Wind
Source: Team Estimates
Source: Team Estimates
improving demand will squeeze weaker participants with poor balance sheets and
tensing cash flow and benefit powerful leaders such as Vanke. (Figure 21) We estimate
Vanke’s sale growth rate will achieve 22.26% 23.72% 24.36% from 2016E to 2018E.
Potential Profit Generating Engine
Property management and logistics property will develop rapidly in the next few years,
especially the later. Logistics facilities have been traditionally developed serve the need
of the industrial storage and expect sectors. However, the rapid growth of e-commerce
(78% CAGR in 2005-2014) which is now being driven more need for convenience and
speed than by cheaper price as was the case a decade ago, is calling for more efficient
logistics in China, including the construction of more modern logistics properties.
China’s rising consumption along with growing income and spending acceleration also
serve as a long-tern structural driver for the segment and providing expansive growth
space. The two will provide much more positive contribution to Vanke’s shareholder
value than today.
Replacing Business Tax with Value-added Tax Reducing Tax Burden
Even though this reformation dose not execute yet, we estimate it will help Vanke to
dispense with about 1% tax burden. Due to local government cannot supply VAT invoice,
the land cost is uncreditable. In this situation cost of construction and installation
become the main deducting item which looks like a paradox: real estate developer has
been delineating the percentage of the cost of construction and installation in build-for-
sale process but now they may prefer leveraging cost of the segment. One possible
solution is providing refined decoration houses to own sufficient deduction limit
therefore benefit from the reformation. Fortunately, Vanke is pioneer in China’s refined
decoration housing market and now all of Vanke’s residential projects are provided to
customers in refined decoration.
Top ROE Generator
As is evident from the Appendix 9, Vanke boasts a strong ROE but does not stack up
entirely with some aggressive and different segment market competitors such as CFLD
and Oceanwide. Fulfilling light asset strategy, Vankes asset turnover ratio(34.9%) is
higher than other players which is also the significant driver of strong ROE. While the
financial leverage of Vanke (4.48 in 2015) seems slightly higher than some developers,
as analyzed above REITs and BOT help Vanke fully using up its brand value leverage and
bearing a little interest burden. We expect Vanke to generate average 20% ROE in
2016E-2017E comparing the sector‘s 12% and leading developer’s average is 16%.
Investment Risk
Regulatory Risk | Stringent Restrictions on Housing Purchase (RR1)
PBC together with CBRC and MOHURD could impose more stringent restrictions in the
determination of housing purchase in first and second-tier cities, which may include
stricter rules of loans approval, higher down payment ratio, higher threshold of second
housings, etc. These restrictions are bound to restrain the purchasing power of
consumers especially those housing speculators. Thus either the housing price or the
sales volume would fall in the future, leading to a decrease in sales.
Economics Risk | Slowdown of Urbanization (ER1)
It is proved above that the urbanization rate is closely related to the sales of commercial
housing. Therefore, the of real estate company is facing a significant amount of risk
caused by the slowdown of urbanization, owing to the longer time L-shaped recovery of
economy than expected.
Economics Risk | Unexpected Change of the De-Stocking Policies (ER2)
With the strong help of tremendous of de-stocking policies, the real estate market is
slowly recovering from a periodical regression nowadays. If such kind of simulative
policies are called off, it may take longer time for the market to boom from the bottom
again, and therefore, greatly weaken the profitability of relevant companies.
Economics Risk | Uncontrollable Economic Downturn (ER3)
Being in great need of the transformation of the pattern of economic development,
China is suffering from economic downturn in recent years and the growth rate of GDP
is approximately three to four percent lower than that of years before. Though Chinese
government has already implemented various policies and set up a great number of
funds to help foster new growth areas in the economy. If such measures are proved
ineffective finally, China may suffer from an uncontrollable economic downturn for a
long time, which will result in the crash of the sales and prices of commercial housing
to a great extent.
Vanke
EM
4.4846
AU
0.3493
NPM
0.1327
ROE
0.2079
MR1
AR1
AR4
AR2
RR1
ER1
MR2
ER3
AR3
ER2
OR1
OR2
0%
50%
100%
150%
0
500
1000
1500
2007 2009 2011 2013 2015
Figure 20: Purchased Land
Value of Vanke
Purchased Land Value
Purchased Land Value/Sales
1.40%
2.10%2.10%
2.20%
2.10%
2.82%
3.0%
8.20%
10.10%
10.80%
12.80%
13.70%
17.20%
17.30%
0%
5%
10%
15%
20%
25%
2009 2010 2011 2012 2013 2014 2015
Figure 21: Vanke's Market
Share Compared with Top 10
Developers'
Top 10 developers market share
Vanke's market share
Source: Wind
Source: Wind
Source: Wind
Table 10: Vanke 2015 ROE Decomposition
Impact
LOW MEDIUM HIGH
Figure 22. Risk Matrix
LOW MEDIUM HIGH
Probability
Source: Team Analysis
Market Risk | Sudden Rise in Interest Rates (MR1)
Having a great demand on borrowing money from financial institutions, the company
may be exposed to the risks caused by floating rate. A steady or dramatic increase on
the interest rates can no doubt higher Vanke’s financial costs, and also reduce the sales
of it owing to the stronger burden of monthly payment of the buyers. It is estimated by
Vanke that, every 50 bp rise of the interest rate will cut down about 86 million yuan of
its net profit and shareholders’ equity.
Market Risk | Change of The Exchange Rate (MR2)
Quoted in Hong Kong and US dollars, the payment of some loans may be influenced by
the variations of the exchange rates. The detailed relationship between the net profit
and shareholders’ equity and the exchange rate is shown in the following table.
* Based on the maintenance of the Linked Exchange Rate System
* Assets which are owned by the subsidiaries oversea or in Hong Kong whose
bookkeeping base currency is not RMB and are not quoted in RMB are not included.
Source: Vanke’s Annual Report (2015)
Operational Risk | Insufficiency in Land Storage (OR1)
Though high turnover rate is a symbol of Vanke’s company enterprise image, its
cautious attitude towards land purchase in recent years has led to a decrease of its total
land storage. Once the land prices go up, Vanke is bound to confront the challenge of
losing the price advantage.
Operational Risk | Fallback Provision of Poor REITs Performance resulting in Profit
Loss (OR2)
Vanke has opened a margin account in order to maintain a minimum margin of RMB 20
million each year. If Vanke’s actual revenue performance showed poor result and its
REITs doesn’t meet the demand, Vanke shall pay enough margin to the trust, which
decreases its total profit.
Asset Restructuring Risk see more in Appendix 12
As is known, Vanke A is currently suspended for asset restructuring, which is quite
special for a company and thus risks seem more material. There may be various risks
through the period of restructuring according to different possibilities of things
occurred based on the company’s actual situation. Main risks that might happen to
Vanke in this process include
Instability of the Management (AR1)
Incorrect Evaluation of Target Assets (AR2)
Uncertainty of Future Performance of the Target Company (AR3)
Uncertainty of Restructuring Success (AR4)
Sensitivity Analysis
We performed a sensitivity analysis (Appendix 13) on several indicators of our pricing
method to determine their impact on the value of Vanke. We determined how much
change in the risk variable would prompt a shift in our recommendation. To supplement
this analysis, we evaluated the impact of a change in these risk variables to the target
price of Vanke. According to our sensitivity analysis, we can safely arrive at the
conclusion that the pricing process is most vulnerable to the value of Ke(capital
expenditure). With a stable cash flow, cautious investing strategies, consummate
platform management and mature property operations, Vanke is capable of resisting
risks deriving from capital expenditure fluctuation.
Risks
Mitigating Factors
Regulatory Risk
Stringent Restrictions
on Housing Purchase
Better quality in
housing provision
Economics Risk
Slowdown of
Urbanization
Implementation of
diversification
strategy
Unexpected Change of
the De-Stocking
Policies
More detailed and
deeper analysis on
the future policies
Uncontrollable
Economic Downturn
Maintenance of the
debt ratio in a proper
stage and avoidance
of excessive land
purchases
Operational Risk
Insufficiency in Land
Storage
Purchase of more
lands
Fallback Provision of
Poor REITs
Performance resulting
in Profit Loss
Better REITs
performance due to
operating income
growth
Market Risk
Sudden Rise in Interest
Rates
Usage of interest
rate swaps
Change of The
Exchange Rate
Usage of foreign
exchange hedge
Asset Restructuring Risk
Instability of the
Management
Improvement in the
Articles of
Association
Incorrect Evaluation of
Target Assets
Independent
intermediary
institutions hired to
provide professional
opinions
Uncertainty of Future
Performance of the
Target Company
Better indemnity
agreements of poor
performance
Uncertainty of
Restructuring Success
Other financing
channels
Change of the
Exchange Rate
Variations of Net Profit
(Million Yuan)
Variations of
Shareholders’ Equity (Million
Yuan)
RMB
Appreciation
RMB
Depreciation
RMB
Appreciation
RMB
Depreciation
USD/HKD*
1%
-27
27
112
-112
SGD
1%
6
-6
6
-6
GBP
1%
-9
9
-9
9
Table 11. Risk Factors and Mitigation
Strategies
Source: Team Analysis
Appendices
Appendix 1: Shareholding Structure
Appendix 2: Comparison of Economic Data between China and Japan
Japan (1990)
China (2015)
Urbanization rate
77.4%
56.1%
GDP growth rate
5.1%
6.9%
GDP per capita
$24576
$8016
Monetary policy
tight
prudent with a slight easing
bias
Government regulation
Tough oversight on loans and land
trade
De-stocking
Source: National Bureau of Statistics of the People’s Republic of China, Statistics Bureau of Japan
Appendix 3: Numerical Relationship between Urbanization Rate and Sales of Commercial Housing
It is widely acknowledged that the acceleration of urbanization helps promote the sales of commercial housing to a great extent.
On the one hand, a great number of immigrants moving from the rural area and beginning their new life in cities, may create a
large demand for housing. On the other hand, local residents, who benefit a lot from the development of local economy boomed
partly by the accelerating urbanization, may also have the demand to better their living qualities through moving into new
houses. In order to clearly estimate the relationship between the sales of commercial housings and urbanization, we gradually
set up the following model which is based on the annual data between 1991 and 2014. As what is shown in the following tables.
X represent the urbanization rate, while Y means the sales of commercial housing.
Table 1. The Meaning of Two Variables
X
Y
Urbanization Rate
Sales of Commercial Housing
Yao Zhenhua
Baoneng
Group
Shenzhen Jushenghua Co., Ltd.
Foresea Life
Insurance Co.,
Ltd.
CHINA VANKE CO., Ltd.
100%
67.4%
51%
6.655%
8.38%
Asset
Management
Plan Contract
9.22%
State-owned Assets Supervision and Administration
Commission of the State Council
China Resources (Holdings) Co., Ltd.
China Resources Co., Ltd.
100%
China Resources International Tendering Co., Ltd.
99.9961%
100%
0.0039%
15.29%
Source: Company Data
1. ADF Test
Table 2. Augmented Dickey-Fuller Unit Root Test on LnX and LnY
Variable
Sequence
Test Statistic
P Value
Result
LnX
Original
-0.858234
0.7828
nonstationary
First Difference
-1.960754
0.3005
nonstationary
Second Difference
-4.000999
0.0263
stationary
LnY
Original
5.366659
1.0000
nonstationary
First Difference
-5.769407
0.0001
stationary
Second Difference
-5.049529
0.0037
stationary
We can clearly see from Table 2 that the second difference sequence of lnX and the first and second difference sequence of lnY
are stationary, which indicates that the prediction based on historical is reliable. Consequently, we can use the historical data of
urbanization rate and sales of commercial housing to forecast their future development.
2. Co-integration Test
Table 3. Co-integration Test (Augmented Dickey-Fuller Unit Root Test on Residual error)
Variable
Test Statistic
P Value
Result
Residual Error
-0.858234
0.0000
stationary
Having passed the co-integration test, which is used to test if there being a spurious regression, the stable relationship between
two the variables are proved. That’s to say, there is a stable relationship between the urbanization rate and the sales of
commercial housing.
3. Pairwise Granger Causality Test
Table 4. Pairwise Granger Causality Test
Hypothesis
Lags
F-Statistic
P Value
Result
LnX does not
Granger Cause
LnY
1
3.37413
0.0811
Reject
2
0.74870
0.4879
Accept
3
1.61730
0.2302
Accept
LnY does not
Granger Cause
LnX
1
1.97868
0.1749
Accept
2
1.29507
0.2996
Accept
3
1.44175
0.2728
Accept
Pairwise Granger Causality Test is used to see whether there is causality between the two variables or not. Having rejected the
original hypothesis under the 10% significance level, variation of LnX is proved to be the cause of change of LnY, indicating that
the promotion of urbanization rate contributes a lot to the increase of the sales of commercial housing.
4. Final OLS Regression
Table 5. Final OLS Regression
Variable
Coefficient
t-Statistic
P Value
C
24.19906
104.9581
0.0000
LnX
5.111354
20.05596
0.0000
AR(1)
0.476897
2.491893
0.0216
Table 6. Basic Test on Final OLS Regression
Test
Test Statistic
R-squared
0.991618
Adjusted R-squared
0.990780
F-statistic
1183.056
Durbin-Watson Test
2.104853
Because the original equation made by OLS regression fails to passed the Durbin-Watson Test, owing to the autocorrelation, we
used AR(1) progress to improve it, and figure out the final equation successfully, which has passed all necessary tests. According
to the equation made by the OLS regression above (Table 5), we can conclude that every 1% growth of the urbanization rate can
bring about 5.111354% increase to that of the sales of commercial housing.
Appendix 4: Porter’s Five Forces Analysis
Bargaining Power of Suppliers | MODERATE
The main suppliers in real estate industry are land and building material suppliers. Lands are possessed by the state and
provided limitedly by the local government in mainland China, which means land suppliers have a strong bargaining power. As
for materials, overcapacity in traditional industries as steel and cement has weakened their bargaining power in providing
products. The strong bargaining power of upstream industries and the leading effects of Vanke itself are the key determinants
in our MODERATE assessment of bargaining power of suppliers.
Bargaining Power of Customers | INSIGNIFICANT
On the one hand, more people will enter big cities as urbanization goes. These newcomers to metropolis, who own no
accommodation in the migrant cities previously, have rigid demands towards housing. On the other hand, urban inhabitants are
LEGEND
0 No threat to the business
1 Insignificant threat to the business
2 Low threat to the business
3 Moderate threat to the business
4 Significant threat to the business
5 High Threat to the business
still in exuberant needs of improving living conditions, which gives rise to the growth of Improved Housing market. The two
factors account for the reason why bargaining power of customers in major big cities is weak. With more than 90% of Vankes
real estate business expanding in first and second-tier cities in which demand of housing exceeds supply mostly, we assess the
bargaining power of customers as INSIGNIFICANT.
Threat of New Entrants | INSIGNIFICANT
With a notable downtrend in real estate industry and a stricter governmental regulation, entering this industry has been harder
than before. There are 141 domestic real estate listed companies, which means it’s quite difficult for the new entrants to grab a
share in the big market compared with old ones who own a more competitive position in getting funds, lands and materials.
These significant barriers (large market size, destocking pressure, newcomer disadvantages) to entry are the basis of our
INSIGNIFICANT assessment of the threat of new entrants.
Threat of Substitute Products | INSIGNIFICANT
The major substitute of commercial residential housing is ensuring housing, which includes low-rent housing, affordable
housing and public rental housing. However, these housings are quite different from commercial housing. Neither are those
housings provided with property rights, nor can they be traded freely. As we estimate the substitute effects to be weak, the
INSIGNIFICANT assessment is given.
Competitive Rivalry within Industry | LOW
The operating revenue of real estate business accounts for more than 98% of Vanke’s Prime Operating Revenue, among which
commercial residential housing makes up the largest portion. The concentration ratio of real estate industry is rather low. While
the top 4 real estate companies take up a market share of barely less than 10% (Figure 12), Vanke has the biggest market share
of about 3%, rising by 0.94% in 5 years. Apart from fierce competition among a great many joint stock enterprises, advantages
due to land policies are more obvious compared with their state-owned counterparts. Some of Vanke’s major competitors,
namely Evergrande, therefore, has a broader business line. In addition, the investment growth rate has slowed down, falling
from about 20% YoY in 2013 to no more than 5% in 2015 within 3 years. As the largest enterprise in this field, however, Vanke
is apparently more capable of resisting risks of being squeezed out than its competitors. Consequently, we assess the competitive
rivalry within industry to be LOW.
Appendix 5: Vanke Share Price and Volume
0
100000000
200000000
300000000
400000000
500000000
600000000
700000000
800000000
900000000
1000000000
0
5
10
15
20
25
30
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-15
Sep-14
Jan-15
May-15
Sep-15
Jan-16
Vanke Share Price and Volume
Volume Share Price
Appendix 6: Base Case, Pre-Simulation Historical and Projected Financial Statements
Consolidated Financial Position Statement
In RMB Millions
2013A
2014A
2015A
2016E
2017E
2018E
Cash and Equivalents
39,896.83
58,849.64
47,540.28
62,805.20
70,784.01
78,736.79
Accounts Receivable and Others
Receivable
66,547.95
80,251.66
117,643.27
112,893.63
172,326.62
182,373.29
Inventories
331,133.22
317,726.38
368,121.93
423,944.41
504,796.66
612,928.24
Other Current Assets
-
4,076.00
7,956.60
7,956.60
7,956.60
7,956.60
Investments in Associates and Joint
Ventures
10,637.49
19,233.66
33,503.42
36,641.41
40,476.25
45,007.94
Investment Properties
11,710.48
7,980.88
10,765.05
10,765.05
10,765.05
11,265.05
Fixed assets and Construction-in-
progress
3,043.43
4,141.83
5,515.84
5,860.96
6,205.07
6,066.69
Intangible Assets
631.76
1,079.24
1,246.68
1,185.82
1,124.95
1,064.09
Other Noncurrent Assets
7,610.32
7,151.25
8,073.66
8,028.87
7,984.08
7,939.29
ASSETS
471,211.48
500,490.54
600,366.73
670,081.95
822,419.30
953,337.99
Short-term Liabilities
5,102.51
2,383.07
1,900.09
-
-
-
Accounts Payables and Others Payable
288,964.72
315,530.16
383,167.12
427,588.47
545,899.40
634,353.09
Long-term Financial Liabilities
44,081.52
46,148.94
52,844.40
52,844.40
52,844.40
52,844.40
Other Liabilities
27,623.31
20,571.15
26,267.70
26,267.70
26,267.70
26,267.70
LIABILITIES
365,772.06
384,633.33
464,179.31
506,700.57
625,011.50
713,465.19
Common Stock
11,014.97
11,037.51
11,051.61
11,051.61
11,051.61
11,051.61
Additional Paid In Capital
8,532.22
8,493.63
8,014.65
8,014.65
8,014.65
8,014.65
Retained Earnings
57,348.79
68,633.43
81,117.26
98,446.09
120,128.7
7
147,188.7
8
Total equity attributable to equity
shareholders of the Company
76,895.98
88,164.57
100,183.52
117,512.35
139,195.04
166,255.05
Minority Interest
28,543.44
27,729.05
36,126.10
45,991.23
58,334.96
73,739.96
TOTAL EQUITY
105,439.42
115,893.62
136,309.62
163,503.58
197,530.00
239,995.00
Total Liabilities And Equity
471,211.48
500,526.94
600,488.92
670,204.15
822,541.50
953,460.19
Consolidated Comprehensive Statement of Cash Flows
Cash flow generated from operation activities
In RMB 00,000
2013A
2014A
2015A
2016E
2017E
2018E
Operating Income
after Income Tax
1,829,754.99
1,928,752.40
2,189,214.18
2,931,031.64
3,682,779.49
4,627,622.49
Depreciation and
amortization
21359.77
116579.32
71,580.63
43,191.23
46,291.23
49,541.23
Provisions, net of
settlement
1,616.54
16548.91
49,594.61
44,862.13
44,862.13
44,862.13
Interest and other
financial income
89,171.51
64,083.95
47,773.58
194,104.31
175,444.29
165,487.04
Inventory Reduction
(7,579,827.80)
(603,962.35)
(1,117,457.72)
(5,582,248.14)
(8,085,224.46)
(10,813,158.32)
Consolidated Comprehensive Income Statement
In RMB Millions
2013A
2014A
2015A
2016E
2017E
2018E
Revenue
135,418.79
146,388.00
195,549.13
239,078.37
295,787.75
367,841.65
Cost of Sales
92,797.65
102,557.06
138,150.63
168,902.96
208,966.74
259,871.04
Business Taxes and Surcharges
11,545.00
13,166.75
17,980.43
21,517.05
26,620.90
33,105.75
Operating Expenses
3,864.71
4,521.89
4,138.27
5,059.45
6,259.56
7,784.38
Administrative Expenses
3,002.84
3,902.62
4,745.25
5,801.54
7,177.67
8,926.15
Financial Expenses
891.72
640.84
477.74
(1,731.68)
(2,789.46)
(3,995.92)
Impairment Losses
60.15
789.76
495.95
448.62
448.62
448.62
Investment Income
1,005.19
4,159.26
3,561.91
3,137.99
3,834.84
4,531.69
Changes in Fair Value
(0.57)
11.01
-
-
-
-
Other Operating Income and Loss
-
-
-
-
-
-
Income from Operations
24,261.34
24,979.36
33,122.78
42,218.41
52,938.57
66,233.32
Other Non-operating Profit and Loss
29.67
273.00
679.84
327.51
327.51
327.51
Income before Income Tax from
Continuing Operation
24,291.01
25,252.36
33,802.62
42,545.92
53,266.07
66,560.83
Income Tax
5,993.46
5,964.84
7,853.18
9,851.98
12,357.81
15,507.28
Net Income
18,297.55
19,287.52
25,949.44
32,693.94
40,908.26
51,053.54
Non-controlling Interest
3,179.00
3,542.07
7,830.03
9,865.13
12,343.74
15,404.99
NI to Common Shareholders
15,118.55
15,745.45
18,119.41
22,828.81
28,564.53
35,648.55
Decrease in
operating
receivables
(1,445,972.97)
(2,698,829.87)
(2,959,724.55)
474,963.55
(5,943,298.88)
(1,004,666.55)
Decrease in
operating payables
7,425,045.92
5,851,502.02
3,433,193.21
4,442,135.04
11,831,092.99
8,845,368.68
Cash flows related to
other operating
activities
2,040,931.70
2,019,814.63
(109,571.88)
-
-
-
Net cash generated
from operation
activities
192,386.89
4,172,481.91
1,304,199.06
2,548,039.76
1,751,946.79
1,915,056.71
Cash flow generated from investment activities
In RMB 00,000
2013A
2014A
2015A
2016E
2017E
2018E
Decease in trading
financial assets
-
-
-
-
Decrease in financial
assets investment
(1,023,220.28)
(1,029,691.47)
(2,459,314.72)
-
-
-
Cash received from
investment income
73,452.24
28,816.60
109,467.86
-
-
-
Cash received from
asset disposal proceeds
(19,189.57)
(565,893.84)
24,880.37
(394.40)
(394.40)
(394.40)
Fixed assets investment
-
-
-
(62000.00)
(65000.00)
(70000.00)
Intangible assets
investment
-
-
-
-
-
-
Investment real estate
investment
243,939.19
183,074.56
206,300.13
(50000.00)
(50000.00)
(50000.00)
Increase in long-term
equity investment
-
-
-
-
-
-
Increase in Long-term
prepaid expenses
-
-
-
-
-
-
Cash flows related to
other investment
activities
19,009.58
565,827.91
565,412.86
24,957.34
24,957.34
24,957.34
Net cash generated from
investment activities
795,441.72
348,737.09
2,094,748.12
87,437.06
90,437.06
95,437.06
Cash flow generated from financing activities
In RMB 00,000
2013A
2014A
2015A
2016E
2017E
2018E
Equity financing
-
-
-
-
Long-term interest-
bearing debt increase
747,679.25
420,836.77
792,419.00
-
-
-
Pay common stock
dividend
875,548.82
1,099,721.87
1,319,100.70
549,997.61
688,184.12
858,854.30
Pay interest
4,843,025.68
4,293,620.98
2,502,857.64
194,104.31
175,444.29
165,487.04
Cash flows related to
other financing
activities
-
319,938.11
202466.27
-
-
-
Cash flow generated
before accounting
short-term debt
4,970,895.25
4,652,567.97
2,827,073.07
744,101.92
863,628.41
1,024,341.34
Increase in short-term
debt
4,446,777.12
3,088,480.56
2,291,109.90
190,008.80
-
-
Net cash generated
from investment
activities
524,118.13
1,564,087.41
510,391.08
934,100.42
863,628.41
1,024,341.34
Appendix 7: ROE Decomposition (Major Competitors)
As is evident from the above matrix, Vanke boasts a strong ROE but does not stack up entirely with some aggressive and different
segment market competitors such as CFLD and Oceanwide. Fulfilling light asset strategy, Vanke’s asset turnover ratio is higher
than other players which are also the significant drivers of strong ROE. While the financial leverage of Vanke seems slightly
higher than some developers, as analyzed above REITs and BOT help Vanke fully using up its brand value leverage and suffer a
little interest burden.
Vanke
CFLD
EM
4.4846
EM
6.5791
AU
0.3493
AU
0.2713
NPM
0.1327
NPM
0.1301
ROE
0.2079
ROE
0.2322
Oceanwide
CMSK
EM
7.8058
EM
3.3927
AU
0.1339
AU
0.2596
NPM
0.2507
NPM
0.1635
ROE
0.2620
ROE
0.1440
Poly
Gemdale
EM
5.7900
EM
4.0605
AU
0.3208
AU
0.2482
NPM
0.1363
NPM
0.1478
ROE
0.1863
ROE
0.0983
Appendix 8: Relative Valuation - Price Multiples Analysis
In analyzing the fundamentals of profitability, growth, and risk for Vanke, our hold recommendation is supported for a number
of reasons.
First and foremost, Vanke generates a profit margin that is notably higher than the mean and median figures of its peer, and a
comparable liquidity (via Current Ratio), Debt to EBITDA, and Total Debt to Assets ratio.
These price discrepancies were expanded upon in our valuation are main drivers of the price target and our Hold
Recommendation.
Table A: Relative Valuation-PE Method
2016E
2017E
2018E
EPS
2.07
2.59
3.23
P/E
13.37
11.1
8.35
Price Per Share(RMB)
27.66
28.72
26.96
Table B: Relative Valuation-PS Method
2016E
2017E
2018E
EPS
21.66
26.79
33.32
P/S
1.5
1.22
0.89
Price Per Share(RMB)
32.39
32.6
29.82
Table C: Relative Valuation-PB Method
2016E
2017E
2018E
BPS
10.65
12.61
15.06
P/B
2.15
1.85
1.45
Price Per Share(RMB)
22.85
23.27
21.77
Appendix 9: Vanke’s Estimated DuPont Analysis
0.00
0.05
0.10
0.15
0.20
0.25
2012A 2014A 2016E 2018E
ROE
0.00
2.00
4.00
6.00
2012A 2014A 2016E 2018E
EM
0.00
0.05
0.10
0.15
2012A 2014A 2016E 2018E
NPM
0.00
0.10
0.20
0.30
0.40
0.50
2012A 2014A 2016E 2018E
AU
Appendix 10: Financial Projection Rationality Analysis
0.00
0.05
0.10
0.15
0.20
0.25
0.30
2013A 2015A 2017E 2019E
EBITDA Growth
0.00
0.05
0.10
0.15
0.20
0.25
0.30
2013A 2015A 2017E 2019E
EBIT Growth Rate
0.00
0.20
0.40
0.60
0.80
1.00
1.20
2012A 2014A 2016E 2018E
Net Operating Profit/Profit
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
2013A 2015A 2017E 2019E
Net Operating Profit
Growth Rate
0.00
0.10
0.20
0.30
0.40
2012A2014A2016E2018E
Cost of SalesSales
0.00
0.02
0.04
0.06
0.08
2012A2014A2016E2018E
ExpensesSales
0.00
0.05
0.10
0.15
2012A2014A2016E2018E
Net Profit Margin
0.00
0.05
0.10
0.15
0.20
0.25
2012A2014A2016E2018E
EBITDASales
0.00
0.05
0.10
0.15
0.20
0.25
2012A2014A2016E2018E
EBITSales
0.00
0.10
0.20
0.30
0.40
2013A 2016E 2019E
Net Margin Growth Rate
0.00
0.10
0.20
0.30
0.40
2013A 2015A 2017E 2019E
Sales Growth Rate
0.00
0.10
0.20
0.30
0.40
0.50
2012A 2014A 2016E 2018E
Total Assets Turnover
0.00
0.10
0.20
0.30
2013A 2015A 2017E 2019E
Total Assets Growth Rate
-0.30
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
2013A 2015A 2017E 2019E
Working capital growth
0.00
0.20
0.40
0.60
0.80
1.00
2012A 2014A 2016E 2018E
Debt-to-assets ratio
0.00
0.05
0.10
0.15
0.20
0.25
0.30
2012A 2014A 2016E 2018E
Investment capital/total assets
0.00
20.00
40.00
60.00
80.00
100.00
2012A 2014A 2016E 2018E
Accounts Receivable Turnover
0.00
20.00
40.00
60.00
80.00
100.00
120.00
2012A 2014A 2016E 2018E
Turnover of Fixed Assets
0.00
0.10
0.20
0.30
0.40
0.50
2012A 2014A 2016E 2018E
Inventory Turnover
Appendix 11: Discounted Cash Flow Analysis
Business Segments
Real Estate Sales Revenue
In 2015 real estate sale revenue income accounted for 97% of total revenue. This business segment has been expanding
considerably; it has grown at a 3-year CAGR of 22%. This segment is driven by three categories:
• Market Share Occupancy Rates
• Rate Received per square foot
• Urbanization stimulate industry increase
These categories have all been positive over the past several years leading to double digit revenue growth. Moving forward, we
project that market share occupancy rates will larger than today, this is due to the fiercer compete involved in the housing
industry.
Continuous urbanization process will increase housing demands and residents’ revenue rise will stimulate improved housing
need. Simply decomposing Vanke’s revenue into Unite price multiply quality, inflation and the scarcity of land resource will push
the nominal price up therefore contributing to Vanke’s revenue increase.
Cost of Construction and Decoration
Vanke’s cost of sale account for land reservation, construction and decoration costs, VAT tax, educational fees and other
operating taxes. Historically, the construction and decoration cost accounts a certain percentage of revenue has been trending
up from 2013 to 2015. As Vanke continues to grow year over year, they will benefit from the economies of scale and the the
recent VAT tax reformation, causing cost of construction and decoration remain a relatively stable percentage of revenue.
Selling General & Administrative Expenses (SG&A)
Based on common size analysis of Vanke’s historical financial statements, we have determined that in a normal year SG&A
accounts for approximately 4.55%of total revenue. As Vanke continues to saturate more markets, they will be able to drive
market share without a substantial amount of advertising expenses. This trend combined with benefits due to economies of
scales, leads to a projection of SG&A decreasing as a percentage of total revenue today.
Depreciation & Amortization
As the majority of Vanke’s growth is fueled by the acquisition of new properties, they will be forced to account for a larger
amount of depreciation in proportion to total revenue.
Interest Expense
Due to their innovation of financing activities such as introducing REITs and cooperating with private equity, Vanke will be
benefit from their financial innovation starting in 2016. Short-term liability will decrease to zero in radically prediction and
partly replace to long-term debt. Therefore, interest expense as a percentage of revenue level will be decrease.
Appendix 12: Asset Restructuring Risk
Asset Restructuring risk |
Instability of the Management (AR1)
As what is shown in Figure 3, Vanke, whose first major shareholder is Jushenghua, does not have a truly actual controller,
indicating the difficulty to change the management team headed by Wangshi, a successful and capable leader. If the assets
reorganization is carried out finally, the share proportion may change again, which will lead to the existence of a new first major
shareholder or even an actual controller, for there being a SPO to take over other companies. If the new first major shareholder
and its coordinated actors make up their mind to replace the management or some of its members with others in the future, the
usual management, short-term or even the long-term plan of Vanke will change greatly, bringing huge uncertainty to the future
development of Vanke.
Asset Restructuring risk |
Incorrect Evaluation of Target Assets (AR2)
In most cases, the asset restructuring is closely relevant to the pricing of target companies. If the valuation model, which is based
on a great number of assumptions and the prediction of future economy, cant suit the future development of the target
companies properly, or the future economy develop in an unexpected way, the pricing of assets may change greatly. This changes
may pose great potential risks to Vankes future evaluation.
Asset Restructuring risk |
Uncertainty of Future Performance of the Target Company (AR3)
Generally speaking, assets reorganization is based on the expectation of the acceptable future profitability of the target company.
If the profit made by it is less than expected, Vanke’s profitability may be greatly influenced too, weakening the performance of
its share simultaneously. Though these problems may be temporarily solved by the performance commitment made by target
companies, if the share of it in locking state is not adequate to keep this promise, Vanke may also suffer from the loss caused by
the bad performance of it.
Asset Restructuring Risk |
Uncertainty of Restructuring Success (AR4)
There are still many potential restructuring possibilities and counterparties till now, which gives rise to the uncertainty of the
success of restructuring. Several reasons may lead to the failure of restructuring. First of all, negotiation between Vanke and the
potential counterparty might break due to the different valuation of the target company they present, market changes and the
uncertainty of earnings outlook. Secondly, certain regulatory problems as incomplete disclosure and illegal transactions
involved might also be in the way. The plan should be approved by both shareholders’ meeting and CSRC. Thirdly, failure in
financing, such as unreasonable pricing towards private placement, may also result in unsuccessful restructuring.
Appendix 13: Sensitivity Analysis
Abnormal Return Method
We performed a sensitivity analysis on several indicators of our pricing method to determine their impact on the value of Vanke.
We determined how much change in the risk variable would prompt a shift in our recommendation. To supplement this analysis,
we evaluated the impact of a change in these risk variables to the target price of Vanke.
Based on the abnormal earnings model, which is chosen to give the absolute valuation of the target stock, we perform a
sensitivity analysis on Ke (capital expenditure) and the sustainable growth rate (g) to see how these two factors potentially
influence the final value, and the results are shown in the matrix.
We set the g at 3% as basic situation in the abnormal earnings model, and for this sensitivity analysis, the stock price is tested
as we change g while holding Ke at different levels. From the matrix we can clearly see that the rangeablility of g under basic
assumption of Ke is 3.89% and the fluctuation decreases as Ke grows.
And for Ke, we hold g constant at different levels to see how the change of Ke may influence the result of our estimation. The
range of the valuation turns out to be relatively high despite of the level of g.
According to our sensitivity analysis, we can safely arrive at the conclusion that the pricing process is most vulnerable to the
value of Ke, thus the process of choosing Ke should be more cautious. With a stable cash flow, cautious investing strategies,
consummate platform management and mature property operations, Vanke is capable of resisting risks deriving from capital
expenditure fluctuation.
Rf
2.50%
Rm
18.00%
β
0.82
Ke
15.21%
In RMB billions
Perpetual Growth
Rate
3.00%
PV of Forecast Period
60.49
PV of Transitional
Period
93.49
PV of Perpetual
Period
38.45
Equity Value
292.60
Shares
Outstanding(billion)
11.04
PPS(RMB)
26.51
Ke
Perpetual Growth Rate(g)
1.86%
2.05%
2.25%
2.48%
2.73%
3.00%
3.30%
3.63%
3.99%
4.39%
4.83%
9.44%
38.36
38.65
38.99
39.39
39.86
40.41
41.08
41.89
42.9
44.18
45.84
10.39%
35.25
35.46
35.7
35.98
36.31
36.69
37.14
37.69
38.36
39.19
40.23
11.43%
32.54
32.69
32.85
33.05
33.28
33.54
33.85
34.22
34.66
35.21
35.88
12.57%
30.15
30.25
30.37
30.51
30.67
30.85
31.06
31.31
31.61
31.96
32.4
13.83%
28.04
28.11
28.2
28.29
28.4
28.52
28.67
28.84
29.04
29.27
29.56
15.21%
26.17
26.22
26.28
26.35
26.42
26.51
26.6
26.72
26.85
27.01
27.19
16.73%
24.51
24.55
24.59
24.63
24.68
24.74
24.81
24.88
24.97
25.07
25.2
18.40%
23.03
23.06
23.08
23.11
23.15
23.19
23.23
23.28
23.34
23.41
23.49
20.24%
21.71
21.73
21.75
21.77
21.79
21.81
21.84
21.88
21.92
21.96
22.01
22.27%
20.53
20.54
20.55
20.56
20.58
20.6
20.62
20.64
20.66
20.69
20.72
24.50%
19.47
19.47
19.48
19.49
19.5
19.51
19.52
19.54
19.55
19.57
19.59
Price Multiples Analysis
Table A: Relative Valuation-PE Method
2016E
2017E
2018E
EPS
2.07
2.59
3.23
P/E
13.37
11.1
8.35
Price Per Share(RMB)
27.66
28.72
26.96
the
Estimated
EPS
the Estimated P/E
10.48
11
11.55
12.13
12.74
13.37
14.04
14.74
15.48
16.26
17.07
1.62
16.98
17.83
18.72
19.65
20.64
21.67
22.75
23.89
25.08
26.34
27.66
1.7
17.83
18.72
19.65
20.64
21.67
22.75
23.89
25.08
26.34
27.66
29.04
1.79
18.72
19.65
20.64
21.67
22.75
23.89
25.08
26.34
27.66
29.04
30.49
1.88
19.65
20.64
21.67
22.75
23.89
25.08
26.34
27.66
29.04
30.49
32.01
1.97
20.64
21.67
22.75
23.89
25.08
26.34
27.66
29.04
30.49
32.01
33.62
2.07
21.67
22.75
23.89
25.08
26.34
27.66
29.04
30.49
32.01
33.62
35.3
2.17
22.75
23.89
25.08
26.34
27.66
29.04
30.49
32.01
33.62
35.3
37.06
2.28
23.89
25.08
26.34
27.66
29.04
30.49
32.01
33.62
35.3
37.06
38.91
2.39
25.08
26.34
27.66
29.04
30.49
32.01
33.62
35.3
37.06
38.91
40.86
2.51
26.34
27.66
29.04
30.49
32.01
33.62
35.3
37.06
38.91
40.86
42.9
2.64
27.66
29.04
30.49
32.01
33.62
35.3
37.06
38.91
40.86
42.9
45.05
Table B: Relative Valuation-PS Method
2016E
2017E
2018E
EPS
21.66
26.79
33.32
P/S
1.5
1.22
0.89
Price Per Share(RMB)
32.39
32.6
29.82
the
Estimated
SPS
the Estimated P/S
1.17
1.23
1.29
1.36
1.42
1.5
1.57
1.65
1.73
1.82
1.91
16.97
19.89
20.88
21.92
23.02
24.17
25.38
26.65
27.98
29.38
30.85
32.39
17.82
20.88
21.92
23.02
24.17
25.38
26.65
27.98
29.38
30.85
32.39
34.01
18.71
21.92
23.02
24.17
25.38
26.65
27.98
29.38
30.85
32.39
34.01
35.71
19.64
23.02
24.17
25.38
26.65
27.98
29.38
30.85
32.39
34.01
35.71
37.5
20.63
24.17
25.38
26.65
27.98
29.38
30.85
32.39
34.01
35.71
37.5
39.37
21.66
25.38
26.65
27.98
29.38
30.85
32.39
34.01
35.71
37.5
39.37
41.34
22.74
26.65
27.98
29.38
30.85
32.39
34.01
35.71
37.5
39.37
41.34
43.41
23.88
27.98
29.38
30.85
32.39
34.01
35.71
37.5
39.37
41.34
43.41
45.58
25.07
29.38
30.85
32.39
34.01
35.71
37.5
39.37
41.34
43.41
45.58
47.86
26.32
30.85
32.39
34.01
35.71
37.5
39.37
41.34
43.41
45.58
47.86
50.25
27.64
32.39
34.01
35.71
37.5
39.37
41.34
43.41
45.58
47.86
50.25
52.76
Table C: Relative Valuation-PB Method
2016E
2017E
2018E
BPS
10.65
12.61
15.06
P/B
2.15
1.85
1.45
Price Per Share(RMB)
22.85
23.27
21.77
the
Estimate
d BPS
the Estimated P/B
1.68
1.77
1.85
1.95
2.04
2.15
2.25
2.37
2.49
2.61
2.74
8.34
14.03
14.73
15.47
16.24
17.05
17.91
18.8
19.74
20.73
21.77
22.85
8.76
14.73
15.47
16.24
17.05
17.91
18.8
19.74
20.73
21.77
22.85
24
9.2
15.47
16.24
17.05
17.91
18.8
19.74
20.73
21.77
22.85
24
25.2
9.66
16.24
17.05
17.91
18.8
19.74
20.73
21.77
22.85
24
25.2
26.46
10.14
17.05
17.91
18.8
19.74
20.73
21.77
22.85
24
25.2
26.46
27.78
10.65
17.91
18.8
19.74
20.73
21.77
22.85
24
25.2
26.46
27.78
29.17
11.18
18.8
19.74
20.73
21.77
22.85
24
25.2
26.46
27.78
29.17
30.63
11.74
19.74
20.73
21.77
22.85
24
25.2
26.46
27.78
29.17
30.63
32.16
12.32
20.73
21.77
22.85
24
25.2
26.46
27.78
29.17
30.63
32.16
33.77
12.94
21.77
22.85
24
25.2
26.46
27.78
29.17
30.63
32.16
33.77
35.45
13.59
22.85
24
25.2
26.46
27.78
29.17
30.63
32.16
33.77
35.45
37.23
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
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company.
Market making:
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Disclaimer:
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author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or
completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This
information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report
should not be considered to be a recommendation by any individual affiliated with CFA Society of China, CFA Institute or the CFA
Institute Research Challenge with regard to this company’s stock.
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